Q3 2018 Stable Coin Report
By Jeremy King. Token Analyst @ DAM. www.dam.gi
10 years down the line and the world is walking into another financial crisis. Global debt levels have surpassed those at the time of the last crash in 2008 and the risk remains that unregulated parts of the financial system could trigger a global panic. Economies in the past that have faced economic crisis, have gone for traditional financial solutions via expansionary or contractionary monetary policies. Greece is a prime example of an economy using a stable fiat currency that suffered severely from the global economic crisis in 2008. The monetary and fiscal policies that were implemented at that time were encouraged by supranational entities. These consisted of the European Commission, European Central Bank, private banking institutions, and the Greek business community. This was due to the Greek government owing a substantial amount of capital to Greek and foreign infrastructure companies which were involved in the 2004 Summer Olympic games in Athens. The increased amount of spending and underreported government deficits back fired on the government as it caused hyperinflation. In April 2010, Prime Minister George Papandreou formally requested an international bailout for Greece. The European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) agree to participate in the bailout. Only causing further debt to the country.
When facing hyperinflation, governments are faced with an uncontrollable devaluation of their currency. This causes a decrease in trade with other countries as they are unable to efficiently and effectively work with an unstable currency. Causing a decrease in purchasing power and increase in inflation. Venezuela recently faced a 95% devaluation of its currency due to shortage of goods. Shortage of goods decreases supply and increases demand, which increases prices. The government may tackle this in two ways. One they have a surge of products brought into the country, which would cost too much for them to cope. Or they reduce the amount of money available. This second approach has been adopted. However, they have devalued their currency and gone for a blockchain innovation solution. According to Simon Brew from Crypto News Review, five zeroes have instantly been knocked off the value of the currency, as the old bolivar has been replaced by something now known as the sovereign bolivar. The sovereign bolivar is a stable coin. “A stable-coin is a cryptocurrency that is often pegged to another stable asset, like gold or the U.S. dollar. It’s a currency that is global but is not tied to a central bank and has low volatility. This allows for practical usage of using cryptocurrency like paying for things every single day.” (Sherman Lee, 2018).
President of Venezuela Maduro’s Sovereign Bolivar is linked to a cryptocurrency (Petro) backed with non- existent oil reserves. And banks are being forced to accept it. Experts in the oil mining and cryptocurrency industry believe this is a scam as there is no physical oil reserve, let alone the infrastructure to mine the oil. Unlike Bitcoin, Ethereum and Litecoin to name a few, stable coins are stable in their purchasing power and face slight inflation at times, which incentivises holders to spend their coins rather than to just hold. Like traditional ‘stable’ fiat currencies, to engineer an efficient and effective currency, there must be a medium of exchange, store of value and a unit of account. This is where Venezuela may have gone wrong.
Economist Friedrich August von Hayek (1974 Nobel Prize Winner) believed that the world would never have true money until it’s taken out of the hands of the government. Therefore, Bitcoineers love to quote him. He wanted to introduce a currency in which the government was not able to stop, which is what is currently occurring in the cryptocurrency industry. One of Hayek’s most famous books, “The Denationalisation of Money”, argues that government shouldn’t have a monopoly on the supply of money and that it should be like all other consumer goods. Allowing private institutions to issue their own currency (the Ducat as he identifies it as) and compete with the governments. Hayek designed the Ducat by:
1. “Issuing party would make the Ducat available by selling it to the public against government money, while promising to keep the price stable.
2. The currency would have one legal obligation: A Ducat holder was permitted to redeem his Ducat for fiat at any time at a fixed rate from the issuer.
3. The legal obligation would act as a price floor.
4. The issuer would also use a monetary policy. If the market price of the Ducat fell below the promised purchasing power, then the issuer could use its fiat reserve (raised in a public sale) to buy Ducat in the market. If the market price rose above the desired purchasing power, then the issuer could print more and sell it on the market.”
This leaves room for the issuer to profit as a market maker and allows the issuer to invest its fiat reserves in appreciating assets. Very similar to the stable coin ecosystem discussed below.
Stable-coin Report | Ecosystems | October 17th 2018 |
The different types of stable-coin ecosystems
There are three different types of stable-coins, each with a different ecosystem. Type 1 is a Fiat-collateralised coin, Type 2 is a Crypto-collateralised coin and Type 3 is a non-collateralised coin that works on an algorithmically controlled ecosystem.
Type 1 — Real asset backed
The first type, are Fiat-collateralized stable-coins. They are backed by real assets such as fiat currency or gold. There has been a substantial increase in stable coins in 2018, below there are several examples of fiat pegged currencies. One that stands out is Tether. For every Tether coin there is 1 USD. This keeps the digital coin stable but comes at a cost. The project must have enough money in the bank to cover the circulating supply and must stay centralized to work. This however creates a scaling issue and must be audited to ensure that the coin is backed by the said amount. Examples of projects can be seen below.
o AAA reserve o CK USD (rank 1631) o Circle (USDC) o Digixgold Tokens (rank 682) o DigixDAO (rank 79) o EURS — by Stasis (rank 270) o Globcoin o GUSD (rank 1767) o Jibred o LBXPeg o PHI (rank 1226) o Rockz o Saga (rank 1056) o Stably o Stronghold USD o Tether (rank 8) o TrueUSD (rank 58) o USD Vault o X8 Currency o XJP (Yen)
Stable-coin Report | Ecosystems | October 17th 2018 |
Type 2 — Crypto-collateralised
Type 2 ecosystems consist of the Crypto-collateralized stable-coins. These coins are backed by a pool of crypto assets, possibly the top 10 performing coins (depending on the coins ecosystem preferences). An example of a successful type 2 stable-coin is Dai. This coin is controlled by MakerDAO, a decentralized organization. The downside to this type of coin is that users are still in a vulnerable position as if the market goes down so will the stable coin. However, there are coins which have been adapted to prevent this from happening. They peg their coin to a pool of cryptocurrencies and fiat currencies. This innovative hedging technique eliminates market exposure in this volatile industry. This ecosystem falls in line with the decentralized architecture seen in the most promising projects to date. Examples of these projects can be seen below.
o Alchemist o Augmint o BitShares (rank 32) o Boreal o Celo o DAI (rank 99) o Havven (rank 439) o Reserve o Staticoin o Unum
Type 3 — Non-collateralised
Lastly is type 3, the algorithmically controlled stable-coin. The most innovative and newest ecosystem model. Its stability comes from the adjustments made based on the supply and demand. It’s an ecosystem that does not have collateral to back it up, but trust. The key criteria needed in a decentralized ecosystem. One promising project that puts trust in this innovative technology is Basis and only time will be able to tell whether this ecosystem will gain the trust needed to succeed. Further example can be seen below.
o Basis o Bitbay official (rank 228) o Carbon o Corion (rank 1930) o Fragments o Geeq (DAM clients) o Kowala o Nubits (rank 847) o Radix Stable Coin o Stable o Stableunit o SteemDollar (rank 262) o Terramoney o Topl
Top 10 performing Stable-coins
In the following section we will be analysing a list of ten of the most promising projects till date. We shall discuss the differences between each project and their ecosystem. Three of which are fiat collateralised stable-coins, three crypto collateralised stable-coins and four algorithmically controlled stable coins. We shall begin with the highest ranked project and ending with the lowest.
Stable-coin Report | Most promising projects | October 17th 2018 |
• Start date — November 2014
• Rank — 8
• Daily volume — $2,293,492,725
• Market cap — $2,688,939,241
Tether is always backed 1-to-1, by traditional currency held in their reserves. They convert cash into digital currency, from national currencies like the US dollar, the Euro, and the Yen. Despite the recent controversial topic around transparency, they state that their reserve holdings are published daily and subject to frequent professional audits. The Tether platform is built on top of open blockchain technologies, leveraging the security and transparency that they provide. Above it is evident that this is that most innovative of its kind at this moment in time. Tether is the most widely integrated digital-to-fiat currency today. Buy, sell, and use tethers at Bitfinex, Shapeshift, GoCoin, and other exchanges. Below we can see the inverse correlation between its market capitalization and price in BTC. As the market capitalization increases, the price in BTC decreases. This shows how the ecosystem behaves when there is an increase in demand, the coin remains stable throughout.
• Start date — January 2018
• Rank — 56
• Daily volume — $7,352,037
• Market cap — $118,949,037
Like Tether, TrueUSD has a type 1 ecosystem. They are very similar to each other. There is an open source smart contracts ensure that there is a 1:1 ratio between the US dollar and TrueUSD coin. Allowing stakeholders to transfer funds without immediate exposure to Bitcoin or Ethereum. TrueUSD on the other hand uses a legal framework that allows to you exchange USD directly with an escrow account. As one of the most widely used legal contracts for asset management, escrow accounts enable regular attestations and complete legal protection for token holders. Furthermore, like Tether they undergo audit checks by third-party institutions where account holding is published regularly and subject to attestations. When comparing to Tether, TrueUSD has the potential to be number one in the stable-coin market. Given the time the project has been around, its daily volume is substantial and has been highly ranked when comparing to the rest of the industry. However, this project has not got the diversity in exchange listing than its main competitor, Tether.
- Start date — December 2017
• Rank — 99
• Daily volume — $5,372,637
• Market cap — $59,320,959
MakerDAO’s DAI has a type 2 ecosystem. Highly ranked in comparison to other veteran like tokens on the market. Backed by various crypto assets, it is designed to have a stable value without borders and restrictions. Their ecosystem allows users to gain additional liquidity from assets so that you can lend yourself a secure and stable form of money. However, it is evident by the graph below that this ecosystem is more price sensitive to market conditions. We can see an adverse correlation between the market capitalisation and the price performance. Q1 was a profit-making period where many projects were selling away there crypto to finance their projects and others to avoid further devaluation of market prices. As the market capitalisation begins to increase during Q1, the we see a slight decline in price towards Q3. When the equilibrium is reached, market capitalisation inversely affects the price of TrueUSD and vice versa as it reaches Q3. It is evident that there is a price correlation between BTC and DAI throughout its existence. However, only time will tell if whether DAI will be the bitcoin of stable-coins around.
• Start date — July 2016
• Rank — 261
• Daily volume — $531,679
• Market cap — $14,713,885
The Steem Dollar has been around since July 2016. Unlike the other stable coins mentioned, Steem Dollar has a type 3 ecosystem. The algorithmically controlled coin was popular in Q4 of 2017. Their coin had reached an all-time high of $13.81, allowing token holders to take a massive profit when the stable-coin was expected to stay pegged at the one-dollar mark (1:1). It becomes evident in Q1 of 2018 below, that as the daily volume increases/decrease (supply and demand), the price of the Steem Dollar fluctuates. This is not seen in the other two types of ecosystems discussed. This also allows their Steemit platform users to make the most of the inflated prices during peak periods, making it more profitable to be using their social media platform. Further adoption of the Steemit platform may only have a positive effect on the price and stability of this unique coin. Helping increase their market exposure and target audience.
• Start date — July 2018
• Rank — 270
• Daily volume — $148,595
• Market cap — $13,966,797
The EURS token has a type 1 ecosystem. It is designed to mirror the EURO on the condition that its value is tied to the value of its collateral. Like Tether, this allows for a decrease in the extreme volatility seen in many cryptocurrency performances. Its compatibility with the traditional financial system allows professional investors to access the cryptocurrency market like how they operate in traditional financial systems. To ensure there is transparency, Stasis follow three verification streams that allows them to do so. They produce daily statements based on statements from the counterparty, quarterly verifications by a Big Four company and they get verifications by a Big Four company on demand of an onboarded entity. Despite being the most recent and successful stable-coin, EURS is ranked 270 out of 2071 in a matter of three months. A very promising project that has a team consists of IT and finance experts with fintech backgrounds. They are advised by highly skilled third-party professionals with international experience in investment, asset management, legal, accounting, regulatory, and business development.
• Start date — November 2014
• Rank — 319
• Daily volume — $210,846
• Market cap — $11,079,062
BitUSD is seen as one of the veterans. Like DAI, BitUSD use a type 2 ecosystem. Known to the producers, BitShares, as a SmartCoin, BitUSD is backed by Bitshares’ native currency, BTS. To retain a 1:1 peg to the USD and to hedge against volatility, each BitUSD (typically) is insured with at least $2 in BTS. These BTS are locked up in a smart contract, and BTS holders can use Bitshares’ network to exchange their coins for BitUSD. This allows the coin to be restriction-free, divisible and fungible. Despite the limited markets BitUSD is available on as seen above, there has been a vast increase in market capitalisation in 2018 so far. The daily volume increase and ranking proves that despite being a veteran there is potential for this coin to take market share away from its competitors.
• Start date — March 2018
• Rank — 469
• Daily volume — $383,058
• Market cap — $5,539,834
The Havven network consists of a type 2 ecosystem like BitUSD. It is an open source protocol so that anyone can integrate with it, including exchanges and decentralized platforms. Built on the Ethereum blockchain and it employs two tokens, both of which are ERC20 compatible. This project solves the scaling problem with the same approach used by closed loop payment networks, which involves charging fees on transactions as well as hedging fees for idle balances. These fees are paid to users who collateralize the network and provide stability. The reason this approach is more scalable than other asset backed solutions is that the fees from the network provide a direct incentive for users to stake their Havven tokens to issue nUSD (the Havven stablecoin). This means that as transaction volumes grow, the value of the havven token increases, which allows for the issuance of more nUSD. This can be seen reflected in the Havven chart below, where an adverse correlation can be seen between pricing, daily volumes and market capitalization. Using network fees to create a virtuous cycle is evidently successful, with examples ranging from American Express to Paypal. The difference between these proprietary systems and Havven is that there is no requirement for a central authority within the Havven network. To issue nUSD, Havven holders must first lock their Havven tokens into a smart contract. This ensures that users transacting with nUSD have confidence that the system is fully collateralized always. Because both Havvens and nUSD are crypto assets on the blockchain, users can see the current state of the system with full transparency. This also ensures the network is protected from censorship and that seizure of the collateral is impossible.
• Start date — September 2014
• Rank — 856
• Daily volume — $20,038
• Market cap — $1,168,606
NuBits Is another veteran in the industry. Traders use NuBits for hedging, arbitrage, savings, and transfers between exchanges. Unlike other projects with type 3 ecosystems, it has not been as successful as its competitors, the Steem Dollar. It has been limited to three exchanges; Upbit, Bittrex and SouthXchange. This does not help penetrate the market and get through to its potential target audience. If it had a sustainable product behind it like the Steem Dollar and its social media platform Steemit, NuBit would also force its stakeholders to use their platform putting them in a better selling position. Despite this, NuBits reached its peak during Q1 of 2018 where it reached top 1 in trading volume at Bittrex with $86M/24h in February. This can also be seen reflected in the increase in market capitalisation in Q1 of 2018 below.
• Start date — TBA
• Rank — N/A
• Daily volume — N/A
• Market cap — N/A
Previously known as Basecoin, Basis contains a type 3 ecosystem like the Steem Dollar. When demand is rising, the blockchain will create more Basis. The expanded supply is designed to bring the Basis price back down. When demand is falling, the blockchain will buy back Basis. The contracted supply is designed to restore Basis price. This protocol is designed to work the way central banks buy and sell fiscal debt to stabilize purchasing power. For this reason, we refer to Basis as having an algorithmic central bank. This innovative mechanism is backed by a spectacular team. The team members’ backgrounds span from Google Search, Ads, and Research, D. E. Shaw & Co., Tower Research Capital, Hudson River Trading, Goldman Sachs, Bridgewater, AngelList, and more. As for the founders, they attended Princeton together and all graduated with degrees in computer science summa cum laude. After college, two of the founders worked together at D. E. Shaw, then at Google before leaving to start Basis. The year and a half old start-up has a tremendous team and ecosystem to which has appealed to many. This was reflected when the team raised a grand total of $133 million from 35 different investors in their last fundraising round in April.
• Start date — TBA
• Rank — N/A
• Daily volume — N/A
• Market cap — N/A
Like Basis, Carbon uses a type 3 ecosystem that is algorithmically controlled. However, according to their whitepaper, to begin with the CarbonUSD, or CUSD, will be composed of a basket of whitelisted tokens. A token that is “whitelisted” may be used to create new CUSD, serving as its collateral. Initially, only one token will be whitelisted, a stable-coin that is 1-to-1 backed with U.S. Dollars in a trust account. They expect CarbonUSD to have much greater liquidity on exchanges than its whitelisted tokens. The team refers to the first whitelisted token as WT0 (“whitelisted-token-0”) and believes its governance to evolve over time. Because WT0 is a fiat-backed stable-coin where users can deposit and withdrawal real USD, CarbonUSD is functionally fiat-backed with the potential to whitelist an algorithmic stable-coin, thus transitioning to a hybrid model. Governing members of the whitelist can decide when CarbonUSD has enough liquidity to safely switch off from full collateralization, which they believe is a robust mechanism for introducing a trust minimized, algorithmic stable-coin to the market that is not dependent on the size of an initial reserve. This unique mechanism that is reached once the said processes have been successfully completed, will only make a stronger foundation for the coin to succeed. With the variety of coins produced to date, this time- consuming process will help themselves differentiate from their competition.
Stable-coin criticism
Critics believe that if a fiat currency would not survive a black swan event, crypto-collateralized stable-coins wouldn’t stand a chance according to their expertise. Even fiat currencies pegged to other fiat currencies, such as the Saudi Arabian Riyal (SAR), which is pegged against the US Dollar, often get too expensive to uphold in the long-term. Some believe that having a fiat collateralized stable-coin wont solve any financial fundamental problem in the first place. This is due to fiat currencies not being stable at all. For example, by pegging a cryptocurrency to the US Dollar, the stable-coin will lose purchasing power through inflation and volatility against other cryptocurrencies. Critics also believe that by having a fiat-collateralized stable-coin, depending on your geographic location, these coins could be seen as derivatives. If so, the coin could be subject to national laws. In the USA, the SEC treats digital currencies as securities, where the same laws that govern stocks are used. From this perspective, a stable-coin should stay stable in its purchasing power rather than towards a fiat currency.
Looking back at what has been discussed and reflecting upon the weaknesses of stable-coins seen below, it is evident that there is a market out there for a stable-coin to change the financial system completely. At this level of technological blockchain innovation, real asset backed stable-coins are the most highly ranked out of the three ecosystems. This is due to the volatility involved in the other two. Being backed by other cryptocurrencies like in type 2, or only backed by the supply and demand of the coin like in type 3, doesn’t give the stability that one truly wants. These two ecosystems are subject to cryptocurrency market crashes. This can also be said of a fiat-collateralized stable-coin, an economy can collapse too. This makes one wonder whether it is time to bring back the gold standard. The gold backed stable-coin would not be influenced by price inflation caused by central banks and governments. This system would provide decentralization, privacy and security.
Summary
To conclude, we may see a mass adoption of stable-coins in the near future. With technological advances made to the stable-coin ecosystem to date, one can only anticipate extremely innovative projects being built on the current foundations. The current foundations have their strengths and weaknesses, just as innovative as each other stable-coin out there. Each approaching a fiat-free and decentralised currency in a different way. This is key to developing an ecosystem that will help fiat currencies facing an economic crisis. The Turkish Lira is a prime example. Having an alternative stable digital currency that is globally competitive, will only improve their current market position. Allowing them to exploit the devaluation of the fiat currency until the supply and demand of products and the economy are stable again. The market is still early. Successful creation of an ideal stable-coin could create fundamental long-term improvements to the world we live in today. In the coming months we may see a pioneering project that will appeal to many, but it’s up to the technological advances that will help the market decide whether it’s the sole winner or not.
Stable-coin Report | Reference list | October 17th 2018 |
